Bar Harbor Bankshares — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unaudited consolidated results. The company operates primarily through Bar Harbor Bank & Trust in Maine, New Hampshire, and Vermont. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and condition
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net interest income | $21.5 | $23.0 | $43.3 | $46.2 |
| Provision for loan losses | $0.6 | $0.8 | $0.9 | $1.6 |
| Non-interest income | $7.5 | $7.1 | $13.6 | $13.4 |
| Non-interest expense | $20.9 | $18.7 | $39.5 | $37.5 |
| Net income | $6.1 | $8.5 | $13.4 | $16.3 |
| Diluted EPS | $0.39 | $0.55 | $0.86 | $1.05 |
| Net interest margin, FTE | 2.65% | 2.91% | 2.71% | 2.95% |
- Profitability: Q2 net income declined about 28% year over year; first-half net income fell about 18%. Adjusted diluted EPS, a non-GAAP measure, was $0.41 for Q2 and $0.88 for the first half, versus $0.56 and $1.08, respectively, a year earlier.
- Revenue and margins: Q2 interest income rose 7%, but higher funding costs more than offset asset growth: interest expense increased to $12.3 million from $8.7 million, and net interest margin fell 26 basis points. Six-month FTE earning-asset yield rose to 4.16% from 3.97%, while the cost of interest-bearing liabilities rose to 1.68% from 1.18%. Q2 non-interest income increased 5%; first-half non-interest income increased 2%.
- Expense and credit costs: Q2 non-interest expense rose 12%, chiefly from salaries and occupancy; management cited strategic hires, higher staffing and new or renovated locations. Provision expense was lower year over year. Q2 net charge-offs were zero on an annualized basis, as reported by management.
- Balance sheet at June 30: Total assets were $3.69 billion, loans $2.58 billion, deposits $2.48 billion, borrowings $776.0 million, and shareholders’ equity $390.6 million. Since year-end 2018, loans rose $88.0 million (7.1% annualized), deposits were essentially flat, and borrowings increased $52.2 million. The loan-to-deposit ratio was 104%, up from 100% at year-end.
- Credit quality: Non-accrual loans decreased to $16.0 million from $18.2 million at year-end; non-accrual loans were 0.62% of loans. The $14.6 million allowance equaled 0.57% of loans, with 91% coverage of non-accrual loans. Total criticized loans increased to $69.8 million from $55.8 million at year-end, including $33.7 million classified as special mention.
- Liquidity and funding: Cash and cash equivalents were $59.9 million, down from $98.8 million at year-end. First-half operating cash flow was $13.6 million versus $15.2 million in 2018; investing cash outflow was $95.9 million, principally reflecting loan growth, while financing provided $43.5 million. Management stated liquidity was sufficient and reported $112.9 million of available secured Federal Reserve borrowing capacity. Brokered time deposits were $599.0 million, up from $466.9 million at year-end.
- Capital and equity: The Bank’s total risk-based capital ratio was 13.42% versus a 10.00% well-capitalized minimum; CET1 was 12.60% versus 6.50%. The company reported a 13.93% total capital ratio and 11.57% CET1 ratio. GAAP book value per share was $25.13; tangible book value per share, non-GAAP, was $18.23. First-half dividends declared were $0.42 per share.
Material changes and notable items
- Loan growth, especially commercial real estate, supported interest income, but increased deposit and borrowing costs compressed net interest income and margins. Management attributed funding-cost pressure partly to prior Federal Reserve rate increases and a flatter yield curve.
- Unrealized gains on available-for-sale securities improved accumulated other comprehensive income by $12.7 million after tax in the first half. Management attributed the securities fair-value increase largely to lower long-term rates; no other-than-temporary impairment losses were recorded.
- The company adopted lease accounting on January 1, 2019, recognizing an operating lease right-of-use asset and liability of $9.0 million at adoption; at June 30, these were $8.6 million and $8.7 million, respectively.
- On July 8, 2019, after quarter-end, the company agreed to acquire eight central Maine branches from People’s United Bank. The branches had approximately $287 million of deposits, $111 million of loans, and $284 million of assets under management as of March 31. The company expected a fourth-quarter 2019 close and said the transaction should be immediately earnings-accretive and reduce its loan-to-deposit ratio. Consideration includes a 6.3% premium on average deposits, 1.2 times annualized wealth-management revenue, and approximately $4.4 million for premises.
Outlook, risks, and contingencies
- Management’s stated second-half priorities were revenue growth through relationship profitability, expense efficiencies, and development of wealth-management businesses. It also planned to review relationship and product profitability, organizational opportunities, and the branch network. No numerical earnings or revenue guidance was provided.
- Interest-rate risk is a key market risk. Modeling indicated that a parallel 200-basis-point decline could reduce net interest income 0.46% over one year and 5.30% over two years; a 200-basis-point increase was estimated to change it by -1.28% and +0.25%, respectively. These are hypothetical scenarios, not forecasts, and depend on assumptions about rates, deposit behavior, prepayments, and balance-sheet actions.
- The company was preparing for CECL adoption on January 1, 2020 and stated the new expected-credit-loss approach could result in a higher allowance. Other disclosed risks include changing economic conditions, competition, interest rates, regulation, market conditions, and access to brokered deposits.
- Management reported no material change in risk factors from the 2018 Form 10-K. Routine litigation was not expected to have a material financial effect. The filing reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether loan and deposit pricing can stabilize net interest margin as funding costs rise, particularly given the 104% loan-to-deposit ratio and increased brokered deposits.
- Whether growth in criticized loans persists and how credit performance, allowance adequacy, and CECL adoption affect provisions and earnings.
- The purchase price, closing conditions, integration costs, deposit retention, and actual earnings contribution of the announced branch acquisition.
- Whether operating-expense growth moderates and management achieves its stated efficiency and relationship-profitability objectives.
- How interest-rate scenarios and customer deposit behavior affect net interest income; the filing cautions that its sensitivity analysis is not a forecast.